What happens after Japan rises its rates?
How it will be reflected on stocks?
- The Guru®Lv 51 decade agoFavorite Answer
Have u heard about 'yen carry trade'?..read on..
Japan is in a zero interest rate regime today. This could change in the month of July if the Central Bank of Japan decides to increase the interest rate.
According to legendary global investor George Soros, funds of close to $200 billion have been borrowed from the Japanese banks under the 'yen carry trade' structure. These funds have essentially been invested in the emerging markets, like India. As of today, approximately $4.5 to $5.0 billion have been invested by various funds and investors from Japan into the Indian markets.
If these funds have been raised through a yen carry trade structure and if the Japanese central bank does increase its interest rate to 1% or even 0.5%, we could witness an outflow of 10% to 20% of those funds invested by the Japanese funds into India. This could adversely affect the Indian capital markets, especially considering the already bearish trend witnessed by our markets over the last month or so.
Yen carry trade, in simple words, means borrowing funds in yen at a very low or negligible interest rate and using this loan to buy higher yielding assets in other markets.
- 4XTraderLv 51 decade ago
The Guru is correct. The BOJ (Bank of Japan) will most like abandon the ZIRP (Zero Interest Rate Policy) and raise rates. This will indeed affect the yen carry trade. The reason inflation is rising in Japan is that Japan flushed the system with yen liquidity. It is estimated that over the past 5 years or so, the BOJ infused the market with about 10 trillion yen. That's alot of liquidity. When you print money like that, you bolster the economy, but you also drive inflation. To stem the inflationary affects of monitization, you raise rates.
Of the 28 main central banks, 24 will be or have raised rates this year. The ECB (European Central Bank) will probably raise rates again in August and I'm pretty sure the Fed will raise rates again in August.
In other words, the world in in a liquidity pool and must raise rates to stem inflation. This will not bode well for the equity markets.
- Anonymous1 decade ago
well japan is facing deflation problems from last 14 years now it's deflation is about to end cpi and ppi of japanese economy show that some how inflation is incrasing and if japan will increase it's intereste then yen will be appricated and stock can be fall coz interest rate and stocks have inverse propotional relation.
- 1 decade ago
Which stocks? Obviously not great for Japanese stocks, but may not have much of an impact on any other stock market.
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- lucky sLv 71 decade ago
Still we will survive as we are serviving now.